[4830-01-p] Published August 12, 2005

DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

REG-156518-04

RIN 1545-BE10

Section 411(d)(6) Protected Benefits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations providing guidance

on certain issues relating to the anti-cutback rules of section 411(d)(6) of the

Internal Revenue Code, which generally protect accrued benefits, early

retirement benefits, retirement-type subsidies, and optional forms of benefit

under qualified retirement plans . The proposed regulations would address the

interaction between the anti-cutback rules of section 411(d)(6) and the

nonforfeitability requirements of section 411(a), and would also provide a

utilization test under which certain plan amendments would be permitted to

eliminate or reduce certain early retirement benefits, retirement-type subsidies, or

optional forms of benefit. These proposed regulations would generally affect

sponsors of, and participants in, qualified retirement plans.

DATES: Written or electronic comments must be received by November 10,

2005.

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 Requests to speak (with outlines of oral comments to be discussed) at the

public hearing scheduled for December 6, 2005, at 10 a.m. must be received by

November 15, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-156518-04), room

5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand-delivered Monday through

Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-156518-

04), Courier=s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,

Washington, DC. Alternatively, taxpayers may submit comments electronically,

via the IRS Internet site at www.irs.gov/regs or via the Federal eRulemaking

Portal at www.regulations.gov (indicate IRS and REG 156581-04). The public

hearing will be held in the Auditorium, Internal Revenue Building, 1111

Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed

regulations, Pamela R. Kinard at (202) 622-6060; concerning submissions of

comments, the hearing, and the requests to be placed on the building access list

to attend the hearing, contact Treena Garrett, (202) 622-7180 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to 26 CFR part 1 under

section 411(d)(6) of the Internal Revenue Code (Code). These proposed

regulations, when fi nalized, would revise Treasury Regulations §1.411(d)-3 to

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provide guidance on when a plan amendment may alter a benefit entitlement with

respect to bene fits accrued before the date of the amendment to add a condition

that is permitted under section 411(a). These rules are intended to reflect the

holding in Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (June 7, 2004).

The proposed regulations would also provide a new method -- a utilization test --

under which a plan amendment is permitted to eliminate or reduce an early

retirement benefit, a retirement-type subsidy, or an optional form of benefit.

Section 411(a) generally provides that an employee’s right to the accrued

benefit derived from employer contributions must become nonforfeitable within a

specified period of service. Section 411(a)(3) provides circumstances under

which an employee’s benefit is permitted to be forfeited without violating section

411(a). Section 411(a)(3)(B) specifically provides that a right to an accrued

benefit derived from employer contributions is not treated as forfeitable solely

because the plan provides that the payment of benefits is suspended for such

period as the employee is employed, subsequent to the commencement of

payment of such benefits: (1) in the case of a plan other than a multiemployer

plan, by the employer who maintains the plan under which such benefits were

being paid; and (2) in the case of a multiemployer plan, in the same industry, the

same trade or craft, and the same geographic area covered by the plan as when

such benefits commenced.

The definition of employment for which benefit payments are permitted to

be suspended is further described in 29 CFR 2530.203-3 of the Department of

Labor Regulations, which interprets section 203(a)(3)(B) of the Employee

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Retirement Income Security Act of 1974 (ERISA), as amended, the counterpart

to section 411(a)(3)(B) of the Code. Employment that satisfies the conditions

described in section 203(a)(3)(B) of ERISA and the regulations thereunder is

referred to as "section 203(a)(3)(B) service." See 29 CFR 2530.203-3(c).

Section 411(d)(6)(A) provides that a plan is treated as not satisfying the

requirements of section 411 if the accrued benefit of a participant is decreased

by an amendment of the plan, other than an amendment described in section

412(c)(8) of the Code or section 4281 of ERISA. Section 411(d)(6)(B) provides

that a plan amendment that has the effect of eliminating or reducing an early

retirement benefit or a retirement-type subsidy, or eliminating an optional form of

benefit, with respect to benefits attributable to service before the amendment is

treated as impermissibly reducing accrued benefits. For a retirement-type

subsidy, this protection applies only with respect to an employee who satisfies

the preamendment conditions for the subsidy (either before or after the

amendment). Section 411(d)(6)(B) also authorizes the Secretary of the Treasury

to provide, through regulations, that section 411(d)(6)(B) does not apply to any

plan amendment that eliminates optional forms of benefit (other than a plan

amendment that has the effect of eliminating or reducing an early retirement

benefit or a retirement-type subsidy).

Section 645(b)(1) of the Economic Growth and Tax Relief Reconciliation

Act of 2001, Public Law 107-16 (115 Stat. 38) (EGTRRA) amended section

411(d)(6)(B) of the Code to direct the Secretary of the Treasury to issue

regulations providing that section 411(d)(6)(B) does not apply to any amendment

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that reduces or eliminates early retirement benefits or retirement-type subsidies

that create significant burdens or complexities for the plan and plan participants

unless such amendment adversely affects the rights of any participant in a more

than de minimis manner.

Section 204(g) of ERISA contains parallel rules to section 411(d)(6) of the

Code, including a similar directive to the Secretary of the Treasury to issue

regulations providing that section 204(g) of ERISA does not apply to any

amendment that reduces or eliminates early retirement benefits or retirement-

type subsidies that create significant burdens or complexities for the plan and

plan participants unless such amendment adversely affects the rights of any

participant in a more than de minimis manner. Under section 101 of

Reorganization Plan No. 4 of 1978 (43 FR 47713) and section 204(g) of ERISA,

the Secretary of the Treasury has interpretive jurisdiction over the subject matter

addressed in these proposed regulations for purposes of ERISA, as well as the

Code. Thus, these proposed Treasury regulations issued under section

411(d)(6) of the Code apply as well for purposes of section 204(g) of ERISA.

On July 11, 1988, final regulations (TD 8212) under section 411(d)(6)

were published in the Federal Register (53 FR 26050). These regulations are

contained in §1.411(d)-4.

In conjunction with the publication of these proposed regulations, final

regulations (TD 9219) under sections 411(d)(6) and 4980F are being published

elsewhere in the Rules and Regulations portion of this issue in the Federal

Register. Those final regulations are contained in §1.411(d)-3, which sets forth

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conditions under which a plan amendment is permitted to eliminate an optional

form of benefit and to eliminate or reduce an early retirement benefit or a

retirement-type subsidy that creates significant burdens or complexities for the

plan and its participants, but only if the elimination does not adversely affect the

rights of any participant in a more than de minimis manner. However, those

regulations reserve 2 topics for later guidance -- the utilization test (currently

reserved in §1.411(d)-3(f)) and the interaction of the permitted forfeiture rules

under section 411(a) with the anti-cutback rules under section 411(d)(6)

(currently reserved in §1.411(d)-3(a)(3)). These proposed regulations would

address these 2 topics as described below.

In Central Laborers’, the plaintiffs were 2 inactive participants in a

multiemployer pension plan who commenced payment of their benefits in 1996

after qualifying for subsidized early retirement payments. The plan terms

required that payments be suspended if a participant engaged in "disqualifying

employment.” At the time of their commencement of benefits, the plan defined

disqualifying employment to include only employment covered by the plan, but

not work as a construction supervisor. Both participants were employed as

construction supervisors after they commenced payment of benefits. Although

the 2 participants’ benefit payments were not suspended in 1996, the plan was

amended in 1998 to expand its definition of disqualifying employment to include

any employment in the same trade or craft, industry, and geographic area

covered b y the plan, and the plan stopped payments to the 2 participants on

account of their disqualifying employment as construction supervisors. The 2

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participants sued to recover the suspended payments, claiming that the

amendment expanding the plan’s suspension provisions violated section 204(g)

of ERISA (the counterpart to section 411(d)(6) of the Code).

The Supreme Court, holding for the 2 participants, ruled that section

204(g) of ERISA prohibits a plan amendment expanding the categories of post-

retirement employment that result in suspension of the payment of early

retirement benefits already accrued. The Court found that, while ERISA permits

certain conditions that are elements of the benefit itself (such as suspensions

under section 411(a)(3)(B) of the Code or section 203(a)(3)(B) of ERISA), such a

condition may not be imposed after a benefit has accrued, and that the right to

receive benefit payments on a certain date may not be limited by a new condition

narrowing that right. The Court agreed with the 7 th Circuit that “[a] participant’s

benefits cannot be understood without reference to the conditions imposed on

receiving those benefits, and an amendment placing materially greater

restrictions on the receipt of the benefit ‘reduces’ the benefit just as surely as a

decrease in the size of the monthly benefit.” Central Laborers’ at 744, quoting

Heinz v. Central Laborers’ Pension Fund , 303 F.3d 802, 805 (7th Cir. 2002).

Rev. Proc. 2005-23 (2005-18 I.R.B. 991) limits the retroactive application

of Central Laborers’ for qualified plans under section 401(a) pursuant to the

Commissioner’s authority under section 7805(b)(8). The revenue procedure

provides that the IRS will not disqualify a plan solely on account of a plan

amendment adopted before June 7, 2004 that violated section 411(d)(6) by

adding or expanding a suspension of benefit provision permitted under section

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411(a)(3) if certain requirements are satisfied. These requirements include the

adoption of a reforming amendment that provides for the payment of benefits

retroactive to June 7, 2004, to affected plan participants. Rev. Proc. 2005-23

does not address participants’ rights to recover benefits under Title I of ERISA.

Rev. Proc. 2005-23 states that Treasury and the IRS intend to propose

regulations that reflect the holding in Central Laborers’. The revenue procedure

provides that the proposed regulations will provide guidance on when an

amendment may add a benefit entitlement condition that is permitted under the

vesting rules with respect to benefits accrued before the date of the amendment.

Those rules are contained in these proposed regulations.

Explanation of Provisions

Interaction of the Permitted Forfeiture Rules Under Section 411(a) with the Anti-
Cutback Rules Under Section 411(d)(6)

The proposed regulations would address the interaction of the vesting

rules in section 411(a) with the anti-cutback rules in section 411(d)(6), taking into

account the decision in Central Laborers’. The regulations would provide that a

plan amendment that decreases accrued benefits, or otherwise places greater

restrictions on the rights to section 411(d)(6) protected benefits violates section

411(d)(6), even if the amendment merely adds a restriction or condition on

receipt of section 411(d)(6) protected benefits that is otherwise permitted under

the vesting rules in section 411(a)(3) through (11). The proposed regulations

would further provide that such a plan amendment is permitted under section

411(d)(6) to the extent it applies with respect to benefits accruing after the

applicable amendment date.

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 The proposed regulations include 3 examples illustrating this rule. One

example includes facts similar to Central Laborers’. Another example illustrates

the interaction of section 411(d)(6) with the rule of parity in section 411(a)(6)(D).

The final example addresses how a plan amendment that changes the plan’s

vesting schedule would violate section 411(d)(6) if the amendment were to place

greater restrictions on the rights to section 411(d)(6) protected benefits. This

example illustrates that the application of this section 411(d)(6) rule to a plan

amendment changing a plan’s vesting schedule is in addition to the requirements

under section 411(a)(10)(A) (requiring that the nonforfeitable percentage of a

participant’s accrued benefit as of the applicable amendment date not be

decreased by the plan amendment) and under section 411(a)(10)(B) (requiring

that the plan permit each participant having not less than 3 years of service to

elect to have his or her nonforfeitable percentage computed without regard to the

plan amendment). Thus, if a plan amendment changes the plan’s vesting

schedule , the amendment must not place greater restrictions (including vesting

restrictions) on a participant’s rights to previously accrued benefits, and must

also comply with section 411(a)(10). As indicated in the example, both of these

requirements are satisfied for an amendment changing a plan’s vesting schedule

if each plan participant is entitled to benefits based on the greater of the new and

old vesting schedules.

While the proposed regulations address the addition of conditions

specifically described in section 411(a), these rules would also apply in other

situations. For example, if a plan provides section 411(d)(6) protected benefits

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that are conditioned on the reemployment of the participant, then a plan

amendment adding additional restrictions with respect to benefits already

accrued on those benefits is required to satisfy section 411(d)(6). However, a

plan amendment is permitted to add restrictions with respect to future accruals.

Utilization Test

The proposed regulations would provide that a plan is permitted to be

amended to eliminate optional forms of benefit that comprise a generalized

optional form1 for a participant with respect to benefits accrued before the

applicable amendment date if certain requirements relating to the use of the

generalized optional form are satisfied. However, under the utilization test, a

plan is not permitted to be amended to eliminate core options (i.e., a straight life

annuity, a 75% joint and contingent annuity, a 10-year term certain and life

annuity, and the most valuable option for a participant with a short life

expectancy). In order to eliminate a noncore optional form of benefit under the

proposed utilization test, 2 conditions must be satisfied: (1) the generalized

optional form is available to a substantial number of participants during the

relevant look-back period and (2) no participant must have elected any optional

form of benefit that is within its generalized optional form during such relevant

look-back period.

If the utilization test is satisfied, the plan could be amended to eliminate all

of the optional forms of benefit that comprise a generalized optional form without

1
The term generalized optional form is defined in §1.411(d)-3(g)(8) as a group of optional forms
of benefit that are identical except for differences due to the actuarial factors that are used to
determine the amount of the distributions under those optional forms of benefit and the annuity
starting dates.

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having to satisfy the burdensome and de minimis requirements of §1.411(d)-3(e).

Treasury and the IRS believe that the utilization test, by its nature, implicitly

determines -- by reference to participant’s elections -- which optional forms of

benefit are considered valuable to plan participants. The fact that no participant

in a substantial sample elected a ny optional form of benefit that is within a

generalized optional form is a compelling indication that elimination of that the

entire generalized optional form would not adversely affect the rights of any

participant in a more than de minimis manner.

The utilization test would provide that the generalized optional form being

eliminated must have been available to at least 100 participants who are taken

into account during the look-back period. The look-back period under the

utilization test in the proposed regulations is the 2 plan years immediately

preceding the plan year in which the plan amendment eliminating the optional

form of benefit is adopted. At least one of the plan years during the look-back

period must be a 12-month plan year. If a plan does not have at least 100

participants who are taken into account during those 2 plan years, the look-back

period is permitted to be expanded to be the 3, 4, or 5 plan years immediately

preceding the plan year in which the plan amendment eliminating the optional

form of benefit is adopted in order to have a look-back period that has at least

100 participants who are taken into account. If a plan does not have at least 100

participants who can be taken into account during the relevant 5-year period, the

plan is not permitted to use the utilization test.

For purposes of the utilization test, a participant is generally taken into

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account only if during the look-back period the participant was eligible to elect to

commence payment of an optional form of benefit that is part of the generalized

optional form being eliminated. However, a participant would not be taken into

account if the participant: did not elect any optional form of benefit with an

annuity commencement date that is within the look-back period; elected an

optional form of benefit that includes a single-sum distribution that applies with

respect to at least 25% of the participant’s accrued benefit; elected an optional

form of benefit that was only available during a limited period of time that

contained a retirement-type subsidy that was not extended to the generalized

optional form being eliminated; or elected an optional form of benefit with an

annuity commencement date that is more than 10 years before normal retirement

age.2 Treasury and the IRS believe that, in light of these restrictions on

participants who are permitted to be taken into account in applying the utilization

test, the sample size of 100 participants who are eligible to elect the generalized

optional form is sufficiently large to demonstrate that elimination of the

generalized optional form would not adversely affect the rights of any plan

participant in a more than de minimis manner.

Under the proposed regulations, a plan amendment eliminating a

generalized optional form under the utilization rule cannot be applicable with

respect to an optional form of benefit with an annuity commencement date that is

earlier than the number of days in the maximum QJSA explanation period (as

2
The term annuity commencement date is defined in §1.411(d)-3(g)(3) as the annuity starting
date, except that, in the case of a retroactive annuity starting date, annuity commencement date
is the date of the first payment of benefits pursuant to a participant election of a retroactive
annuity starting date, as defined in §1.417(e)-1(b)(3)(iv).

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defined in §1.411(d)-3(g)(9)) after the date the amendment is adopted. This

waiting period is the same as the waiting period for the elimination of an optional

form of benefit under the redundanc y rule in §1.411(d)-3(c)(1)(ii).

Proposed Effective Date

The rules relating to section 411(a) nonforfeitability provisions are

proposed to be effective June 7, 2004, the date of the Central Laborers’ decision.

The rules relating to the utilization test are proposed to be effective for

amendments adopted after December 31, 2006. With respect to the rules

relating to the utilization test, these proposed regulations cannot be relied upon

until they are adopted in final form in the Federal Register.

Special Analyses

It has been determined that these proposed regulations are not a

significant regulatory action as defined in Executive Order 12866. Therefore a

regulatory assessment is not required. It also has been determined that section

553(b) of the Admi nistrative Procedure Act (5 U.S.C. chapter 5) does not apply to

these regulations. Because these regulations do not impose a collection of

information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)

does not apply. Pursuant to section 7805(f) of the Code, these proposed

regulations will be submitted to the Chief Counsel for Advocacy of the Small

Business Administration for comment on their impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original and eight

(8) copies) or electronic comments that are submitted timely to the IRS. The

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Treasury and IRS specifically request comments on the clarity of the proposed

rules and how they can be made easier to understand. All comments will be

available for public inspection and copying.

A public hearing has been scheduled for December 6, 2005, beginning at

10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue,

NW., Washington, DC. Due to building security procedures, visitors must enter

at the main entrance, located at 1111 Constitution Avenue, NW. In addition, all

visitors must present photo identification to enter the building. Because of

access restrictions, visitors will not be admitted beyond the immediate entrance

area more than 30 minutes before the hearing starts. For information about

having your name placed on the building access list to attend the hearing, see

the “FOR FURTHER INFORMATION CONTACT” portion of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who

wish to present oral comments must submit written or electronic comments and

an outline of the topics to be discussed and time to be devoted to each topic

(signed original and eight (8) copies) by November 15, 2005. A period of 10

minutes will be allotted to each person for making comments. An agenda

showing the scheduling of the speakers will be prepared after the deadline for

receiving comments has passed. Copies of the agenda will be available free of

charge at the hearing.

Drafting Information

The principal author of these proposed regulations is Pamela R. Kinard,

Office of Division Counsel/Associate Chief Counsel (Tax Exempt and

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Government Entities), Internal Revenue Service. However, personnel from other

offices of the Internal Revenue Service and Treasury Department participated in

their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an

entry in numerical order to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.411(d)-3 also issued under 26 U.S.C. 411(d)(6) and section

645(b) of the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub.

L. 107-16 (115 Stat. 38).* * *

Par. 2. Section 1.411(d)-3 is amended by:

1. Revising paragraph (a)(3).

2. Adding Examples 3 and 4 to paragraph (a)(4).

3. Adding Example 3 to paragraph (b)(4).

4. Revising paragraph (f).

5. Adding Example 6 to paragraph (h).

6. Adding paragraphs (j)(3) and (j)(4).

The revisions and additions read as follows:

§1.411(d)-3 Section 411(d)(6) Protected Benefits.

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*****

(a) * * *

(3) Application of section 411(a) nonforfeitability provisions with respect to

section 411(d)(6) protected benefits. The rules of this paragraph (a) apply to a

plan amendment that decreases a participant’s accrued benefits, or otherwise

places greater restrictions or conditions on a participant’s rights to section

411(d)(6) protected benefits, even if the amendment merely adds a restriction or

condition that is otherwise permitted under the vesting rules in section 411(a)(3)

through (11). However, such an amendment does not violate section 411(d)(6)

to the extent it applies with respect to benefits that accrue after the applicable

amendment date .

*****

(4) * * *

Example 3. (i) Facts. Employer N maintains Plan C, a qualified defined

benefit plan under which an employee participates upon completion of 1 year of
service and is vested in 100% of the employer-derived accrued benefit upon
completion of 5 years of service. Plan C provides that a former employee’s years
of service prior to a break in service will be reinstated upon completion of 1 year
of service after being rehired. Plan C has participants who have fewer than 5
years of service and who are accordingly 0% vested in their employer-derived
accrued benefits. On December 31, 2007, effective January 1, 2008, Plan C is
amended, in accordance with section 411(a)(6)(D), to provide that any nonvested
participant who has 5 consecutive 1-year breaks in service and whose number of
consecutive 1-year breaks in service exceeds his or her number of years of
service before the breaks will have his or her pre-break service disregarded in
determining vesting under the plan.

(ii) Conclusion. Under paragraph (a)(3) of this section, the plan

amendment does not satisfy the requirements of paragraph (a) of this section,
and thus violates section 411(d)(6), because the amendment places greater
restrictions or conditions on the rights to section 411(d)(6) protected benefits, as
of January 1, 2008, for participants who have fewer than 5 years of service, by

16
restricting the ability of those participants to receive further vesting protections on
benefits accrued as of that date .

Example 4. (i) Facts--(A) Employer O sponsors Plan D, a qualified profit

sharing plan under which each employee has a nonforfeitable right to a
percentage of his or her employer-derived accrued benefit based on the following
table:

Completed years of service Nonforfeitable percentage

Fewer than 3 0%
3 20%
4 40%
5 60%
6 80%
7 100%

(B) In January 2005, Employer O acquires Company X, which maintains

Plan E, a qualified profit sharing plan under which each employee who has
completed 5 years of service has a nonforfeitable right to 100% of the employer-
derived accrued benefit. In 2006, Plan E is merged into Plan D. On the effective
date for the merger, Plan D is amended to provide that the vesting schedule for
participants of Plan E is the 7 -year graded vesting schedule of Plan D. In
accordance with section 411(a)(10)(A), the plan amendment provides that any
participant of Plan E who had completed 5 years of service prior to the
amendment is fully vested. In addition, as required under section 411(a)(10)(B),
the amendment provides that any participant in Plan E who has at least 3 years
of service prior to the amendment is permitted to make an irrevocable election to
have the vesting of his or her nonforfeitable right to the employer-derived
accrued benefit determined under either the 5-year cliff vesting schedule or the
7-year graded vesting schedule. Participant G, who has an account balance of
$10,000 on the applicable amendment date, is a participant in Plan E with 2
years of service as of the applicable amendment date. As of the date of the
merger, Participant G’s nonforfeitable right to G’s employer-derived accrued
benefit is 0% under both the 7-year graded vesting schedule of Plan D and the 5-
year cliff vesting schedule of Plan E.

(ii) Conclusion. Under paragraph (a)(3) of this section, the plan

amendment does not satisfy the requirements of paragraph (a) of this section
and violates section 411(d)(6), because the amendment places greater
restrictions or conditions on the rights to section 411(d)(6) protected benefits with
respect to G and any participant who has fewer than 7 years of service and who
elected (or was made subject to) the new vesting schedule. A method of
avoiding a section 411(d)(6) violation with respect to account balances
attributable to benefits accrued as of the applicable amendment date and
earnings thereon, would be for Plan D to provide for the vested percentage of G
and each other participant in Plan E to be no less than the greater of the 2

17
vesting schedules (e.g., for G and each other participant in Plan E to be fully
vested if the participant completes 5 years of service) for those account balances
and earnings.

*****

(b) * * *

(4)* * *

Example 3. (i) Facts. Plan C, a multiemployer defined benefit plan in a

particular industry, provides that a participant may elect to commence
distributions only if the participant is not currently employed by an employer
maintaining the plan and provides that, if the participant has a specified number
of years of service and a ttains a specified age, the distribution is without any
actuarial reduction for commencement before normal retirement age. Since the
plan’s inception, Plan C has provided for suspension of pension benefits during
periods of disqualifying employment (ERISA section 203(a)(3)(B) service).
Before 2007, the plan defined disqualifying employment to include any job as an
electrician in the particular industry and geographic location to which Plan C
applies. This definition of disqualifying employment did not cover a job as an
electrician supervisor. In 2005, Participant E, having rendered the specified
number of years of service and attained the specified age to retire with a fully
subsidized early retirement benefit, retires from E’s job as an electrician with
Employer Y and starts a position with Employer Z as a n electrician supervisor.
Employer Z is not a participating employer in Plan C but is an employer in the
same industry and geographic location as Employer Y. When E left service with
Employer Y, E’s position as a electrician supervisor was not disqualifying
employment for purposes of Plan C’s suspension of pension benefit provision,
and E elects to commence benefit payments in 2005. In 2006, effective January
1, 2007, Plan C, in accordance with section 411(a)(3)(B), is amended to expand
the definition of disqualifying employment to include any job (including
supervisory positions ) as an electrician in the same industry and geographic
location to which Plan C applies. On January 1, 2007, E’s pension benefits are
suspended because of E’s disqualifying employment as a n electrician supervisor.
(These facts are generally comparable to the facts in Central Laborers’ Pension
Fund v. Heinz, 541 U.S. 739 (June 7, 2004).)

(ii) Conclusion. Under paragraphs (a)(3) and (b)(1) of this section, the
2007 plan amendment violates section 411(d)(6), because the amendment
places greater restrictions or conditions on a participant’s rights to section
411(d)(6) protected benefits to the extent it applies with respect to benefits that
accrued before January 1, 2007. The result would be the same even if the
amendment did not apply to former employees and instead applied only to
participants who were actively employed at the time of the applicable
amendment.

18
*****

(f) Utilization test--(1) General rule. A plan is permitted to be amended to

eliminate all of the optional forms of benefit that comprise a generalized optional

form (as defined in paragraph (g)(8) of this section) for a participant with respect

to benefits accrued before the applicable amendment date if--

(i) None of the optional forms of benefit being eliminated is a core option,

within the meaning of paragraph (g)(5) of this section;

(ii) The plan amendment is not applicable with respect to an optiona l form

of benefit with an annuity commencement date that is earlier than the number of

days in the maximum QJSA explanation period (as defined in paragraph (g)(9) of

this section) after the date the amendment is adopted;

(iii) The generalized optional form has been available to at least 100

participants who are taken into account during the look-back period; and

(iv) No participant has elected any optional form of benefit that is part of

the generalized optional form with an annuity commencement date that is within

the look-back period.

(2) Look-back period. For purposes of this paragraph (f), the look-back

period is the 2 plan years immediately preceding the plan year in which the plan

amendment eliminating the generalized optional form is adopted. At least one of

the plan years during the look-back period must be a 12-month plan year.

However, if a plan does not have at least 100 participants who are taken into

account under this paragraph (f) during those 2 plan years, the look-back period

is permitted to be expanded to be the 3, 4, or 5 plan years immediately preceding

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the plan year in which the plan amendment eliminating the generalized optional

form is adopted in order to have a look-back period that has at least 100

participants who are taken into account under this paragraph (f). If a plan does

not have at least 100 participants who are taken into account under this

paragraph (f) during the relevant 5-year period, the plan is not permitted to add

more plan years to the look-back period and, accordingly, such a plan is not

permitted to use the utilization test in this paragraph (f).

(3) Participants taken into account. Except as provided in this paragraph

(f)(3), a participant is taken into account for purposes of this paragraph (f) only if

the participant was eligible to elect to commence payment of an optional form of

benefit that is part of the generalized optional form being eliminated with an

annuity commencement date that is within the look-back period. However, a

participant is not taken into account if the participant either--

(i) Did not elect any optional form of benefit with an annuity

commencement date that was within the look-back period;

(ii) Elected an optional form of benefit that included a single-sum

distribution that applied with respect to at least 25% of the participant’s accrued

benefit;

(iii) Elected an optional form of benefit that was only available during a

limited period of time and that contained a retirement-type subsidy which at that

annuity commencement date was not extended to the optional form of benefit

with the same annuity commencement date that is part of the generalized

optional form being eliminated; or

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 (iv) Elected an optional form of benefit with an annuity commencement

date that was more than 10 years before normal retirement age.

(4) Default elections. For purposes of this paragraph (f), an election

includes the payment of an optional form of benefit that applies in the absence of

an affirmative election.

*****

(h) * * *

Example 6. (i) Facts involving elimination of noncore options using

utilization test--(A) In general. Plan G is a calendar year defined benefit plan
under which participants may elect to commence distributions after termination of
employment in the following actuarially equi valent forms, with spousal consent, if
applicable: a straight life annuity; a 50%, 75%, or 100% joint and contingent
annuity; or a 5-year, 10-year, or a 15-year term certain and life annuity.
Participants whose benefits are under $5,000 are permitted to elect a single-sum
distribution. The annuities offered under the plan are generally available both
with and without a social security leveling feature. The social security leveling
feature provides for an assumed commencement of social security benefits at
any age selected by the participant between the ages of 62 and 67. Under Plan
G, the normal retirement age is defined as age 65.

(B) Utilization test. In 2007, the plan sponsor of Plan G, after reviewing
participants’ benefit elections, determines that no participant in the 2 prior plan
years (2005 and 2006) elected a 5-year term certain and life annuity with a social
security leveling option. During the 2 prior plan years, Plan G has made the 5-
year term certain and life annuity with a social security leveling option available to
142 participants who were at least age 55 and who elected an optional form of
benefit with an annuity commencement date during that 2-year period. In
addition, during 2005-06 plan years, 20 of the 142 participants elected a single -
sum distribution and there was no retirement-type subsidy available for a limited
period of time. Plan G, in accordance with paragraph (f)(1) of this section, is
amended on September 1, 2007, effective as of January 1, 2008, to eliminate all
5-year term certain and life annuities with a social security leveling option for all
annuity commencement dates on or after January 1, 2008.

(ii) Conclusion. The amendment satisfies the requirements of paragraph

(f) of this section. First, the 5 -year term certain and life annuity with a social
security leveling option is not a core option as defined in paragraph (g)(5) of this
section. Second, the plan amendment is not applicable with respect to an
optional form of benefit with an annuity commencement date that is earlier than

21
the number of days in the maximum QJSA explanation period after the date the
amendment is adopted. Third, the 5-year term certain and life annuity with a
social security leveling option has been available to at least 100 participants who
are taken into account for purposes of paragraph (f)(4) of this section during the
look-back period of 2005 and 2006. Fourth, during that period, no participant
elected any optional form that is part of the generalized optional form being
eliminated (i.e., the 5-year term and life annuity with a social security leveling
option).

*****

(j) * * *

(3) Effective date for rules relating to section 411(a) nonforfeitability

provisions . The rules provided in paragraph (a)(3) of this section are effective

June 7, 2004.

(4) Effective date for rules relating to utilization test. The rules provided in

22
paragraph (f) of this section are effective for amendments adopted after

December 31, 2006.

*****

Deputy Commissioner for Services and Enforcement

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